My doctoral research focusses on the effect of sovereign default risk on the size of the government spending multiplier.
The government spending multiplier, fiscal stress and risk (Job Market Paper)
According to a growing empirical literature the government spending multiplier appears to be relatively small in times of fiscal stress. I employ a medium-scale DSGE model with leverage constrained banks and sovereign default risk to analyze how the presence of fiscal stress can affect the transmission of government spending shocks. I find that the role of fiscal stress for the size of the government spending multiplier is negligible when analyzing the linearized economy. When the model is solved using a third-order approximation to equilibrium dynamics, however, and the effects of risk on the transmission of a government spending shock are therefore accounted for, the presence of fiscal stress can lead to a substantial decrease of the government spending multiplier, which is in line with the empirical evidence. For plausible calibrations of the model, the cumulative multiplier can even become negative.
Keywords: government spending multiplier, fiscal stress , aggregate risk, financial frictions
JEL Classifications: E32, E 44, E62, H30, H60
Current version: here
Fiscal Retrenchment and Sovereign Risk (BDPEMS Working Paper Series WP_2015-07)
How does sovereign risk affect the dynamic consequences of identified contractionary government spending shocks? I apply a regime-switching SVAR on Italian data and find that in periods in which government bond yield spreads are high, cumulative government spending multipliers are smaller than in the calm regime. This empirical finding supports theoretical arguments that associate fiscal distress with low multipliers (e.g. Corsetti et al. (2013), Economic Journal). An additional result is that in the crisis regime, risk spreads increase after contractionary government spending shocks. This challenges the suggestion that declining risk premia are the reason for the attenuated output response in the crisis regime.
Keywords: government spending multiplier, sovereign risk, fiscal retrenchment, state-dependent multipliers
JEL Classification: E32, E62, E63, H60
Current version: here
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